I DIVERSITY OF ILLINOIS LIBRARY AT URBANA-CHAMPAIGN AGRICULTURE AVERAGE ANNUAL NET FARM EARNINGS (1936-1945) ON 240 NORTH-CENTRAL ILLINOIS FARMS (Adjusted to average size of business) $16,000- 15,000- 14,000- 13,000- 12,000- 11,000- 10,000- 9,000- 8,000- 7,000- 6,000- 5,000- 4,000- ^ C?Y AGRICUUURE UBRARY" WHY SOME FARMS EARN SO MUCH MORE THAN OTHERS By M. L. MOSHER and V. 1. WEST Bulletin 558 University of Illinois Agricultural Experiment Station CONTENTS HOW THE STUDY WAS MADE 5 EFFICIENCY FACTORS THAT AFFECT NET FARM EARNINGS 8 Yields of Grain Crops 11 Crop System 11 Efficiency in Producing Livestock 14 Amount of Livestock 14 Prices Received 15 Labor Costs 18 Power and Machinery Costs 21 Building and Fencing Costs 23 Cost of Limestone and Fertilizer 25 Well-Balanced Farm Programs Most Profitable 25 VOLUME OF BUSINESS AS RELATED TO NET FARM EARNINGS . . .28 HOW SOME FARMS INCREASED THEIR EARNINGS MORE THAN OTHERS 30 EXPLANATION OF TERMS USED IN THIS STUDY 34 NOTE ON THE STATISTICAL RESULTS 39 SUMMARY. 40 Urbana, Illinois August, 1952 Publications in the Bulletin series report the results of investigations made or sponsored by the Experiment Station FOREWORD The study reported in this publication was undertaken to learn the net effect on earnings of each of several factors used in measuring the efficiency of organization and operation of farms and to find the rela- tionships between each factor and each of the other factors. A pre- liminary study showed that the selected factors were related to farm earnings. It is recognized that it is difficult to isolate the net effects of such complex and related factors. The report may help other research workers to design more complete models for farm-record analysis. Farmers can use this report as a guide in evaluating the efficiency of their operations, while recognizing that on individual farms the importance of the different factors will vary greatly. The net effect of any one factor may appear small as an average of a large number of farms, but it may have a great deal to do with making earnings high or low on any particular farm. The authors acknowledge and appreciate the work of the 240 north-central Illinois farmers who during ten consecutive years kept the records on which the study was based and that of the following fieldmen who supervised the record keeping — W. A. Herrington, B. E. King, E. G. Fruin, and M. P. Gehlbach. The assistance of H. C. M. Case, P. E. Johnston, and E. J. Working in planning the study and of many members of the Department of Agricultural Economics for criti- cal reading of the manuscript is acknowledged with appreciation. THE AUTHORS WHY SOME FARMS EARN SO MUCH MORE THAN OTHERS By M. L. MOSHER and V. I. WEST1 ONE FARMER IN FIVE in the center of the corn belt earns enough more than the lowest-earning of the other four similar farmers to pay for his farm in fifteen to twenty years from the differ- ence in earnings. One farmer is very successful, gives his family a good living, and pays for his farm in twenty to thirty years, while a neigh- bor with a farm of the same size on equally good land may have trouble making ends meet or may even lose a farm that he had in- herited free from debt. Farm records have always shown wide differences in earnings among similar farms. During the seven years 1916-1922, an average difference of $19.17 an acre was found between the one-fifth high- earning farms and the one-fifth low-earning farms in a study in Woodford county. In a later study in Livingston, McLean, Tazewell, and Woodford counties, a similar comparison showed that differences in net earnings varied from $9.30 an acre during the depression years of 1932-1934 to $26.09 during the war and postwar years 1944-1946. Why do some farmers earn so much more than others who operate similar farms? This study was undertaken to find the answer. HOW THE STUDY WAS MADE This study is based on ten-year summaries, 1936 to 1945, of farm- account records kept by 240 cooperators in the Farm-Bureau Farm- Management Service.2 The records were from farms located in seven- teen counties in north-central Illinois (Fig. 1). Records of the total farm business were used in making the study. Less than half the farms were owner-operated. In this regard this group of farms was typical of farms in the area as a whole, where 50 to 60 percent are operated by tenants. Many farmers owned some land and rented additional land. 1 M. L. MOSHER, Professor of Farm Management; and V. I. WEST, Assistant Professor of Agricultural Economics. 1 The Farm-Bureau Farm-Management Service is a service for farmers con- ducted by the University of Illinois Department of Agricultural Economics in cooperation with county farm bureaus. Records kept by cooperating farmers are supervised by fieldmen trained in farm management, who spend all their time with about 200 farmers each. About 80 percent of all costs of the service is from annual fees paid by the cooperating farmers. BULLETIN No. 558 [August, Locations of the 240 farms included in this study are shown by the numbers in the counties. (Fig- 1) The farms as a group were considered to be somewhat above aver- age in native productivity and the efficiency with which they were operated. Quality of land. The soil on most farms was dark prairie loam. A few farms had a little light timber or sandy soil, and a few farms in the eastern part of the area had dark prairie soils underlain with tight clay subsoils. All farms were on soils recognized as good cornland. Most of the land was tillable. On 40 percent of the farms, all of the land was tillable, 25 percent of the farms had 90 percent or more of the land tillable, 21 percent had 80 to 90 percent tillable, and 14 percent had less than 80 percent tillable. Most farms had some sloping land subject to sheet erosion. Some slopes were steep enough to require permanent grass waterways, and a few had to be contour-farmed, strip-cropped, or terraced to avoid serious erosion. Size. The farms were somewhat larger than others in the same area. They averaged 277 acres for the ten years. The smallest farm averaged 84 acres for the period and the largest 728 acres. According to the 1940 Census, the average size of all farms in the area that were over 70 acres was 200 acres. Compared with all farms in the area, relatively few of the 240 farms averaged less than 180 acres while a much larger proportion were over 260 acres. The fact that the farms 1952} WHY SOME FARMS EAKN So MUCH MORE 7 studied were somewhat larger than average, however, does not interfere with the major purpose of the study, which was to learn why some farms earn so much more than other similar farms. Type of farming. Mixed grain and livestock farming prevails in the area. Fifteen percent of the farms included in the study were clas- sified as grain farms because they fed less than 30 percent of the total crop returns; 36 percent were mixed grain-and-livestock farms, feed- ing 30 to 60 percent of the crops ; and 49 percent were livestock farms, where 60 percent or more of the total crop returns was fed to pro- ductive livestock. Prices. The period 1936-1945 divides naturally into two equal parts: the five prewar years of 1936 to 1940 and the five years 1941- 1945, which were dominated by the war. Prices received by Illinois farmers rose from 110 percent of the 1910-1914 level during the first five years to 171 percent during the second five years. Prices paid by U. S. farmers for commodities, interest, taxes, and wages rose from 126 percent of the 1910-1914 level during the prewar years to 156 percent during the war years. Measurements of earnings. Farm and family earnings averaged $4,300 a year more on the 72 highest-earning farms (30 percent of all 240) than on the 72 farms with lowest earnings (Table 1). "Farm and family earnings" is about the same as "gross profit" as used on the Federal Income Tax Form 1040F. This measure is closely related to both size and efficiency of the farm business, as also are the measures "operator's labor and management earnings" and "management earnings." (See page 35 for explanation of these terms.) Table 1. — Farm Earnings, Size of Farm, and Quality of Land: Averages for 240 North-Central Illinois Farms, 1936-1945 70 Differences Item All 240 farms highest- earning farms* medium- earning farms* lowest- earning farms* between high- and low-earning Total farm and family earnings. . $7 910 $10 150 $7 780 $5 850 $4 300 Net earnings per $100 charged for $158 $193 $156 $126 $67 Percent earned on investment . . . 8.0 10.3 7.8 5.9 4.4 Operator's labor and management $3 970 $6 060 $3 830 $2 060 $4 000 Management earnings $3 200 $5 280 $3 080 $1 290 $3 990 $25 . 30 $32.87 $25.00 $18.13 $14.74 Size of farm, total acres 277 281 275 276 5 Percent tillable 90 90 90 89 1 2.3 2.3 2.3 2.4 -.1 ' On the basis of net earnings per $100 charged for land, labor, and capital. 8 BULLETIN No. 558 [August, To compare only the efficiency with which farms are operated, a measure is needed that is largely independent of the size of the farm and the quality of the land. Two such measures are rate earned on investment and net earnings per $100 charged for land, labor, and capital. "Rate earned on investment," however, considers only the investments in land and capital. "Net earnings per $100 charged for land, labor, and capital" measures the combined inputs of all three factors of production — land, labor, and capital. For that reason it has been selected for use in this study as the measure of the efficiency of the organization and operation of the farms. Hereafter, unless otherwise stated, a reference to high- or low- earning farms means that the farms have high or low net earnings per $100 charged for land, labor, and capital. EFFICIENCY FACTORS THAT AFFECT NET FARM EARNINGS The effects on net farm earnings of ten efficiency factors and two factors relating to volume of business were studied (Tables 2, 3, and 5) . Five of the efficiency factors were directly related to gross income and five to farm expenses. The relative importance of these factors, except "percent of normal miscellaneous costs,"1 and the relationships between them are discussed in the following pages. The two factors relating to volume of business are discussed on pages 28 to 30.2 The net effect on net earnings of each of the ten efficiency factors was estimated by a standard procedure called linear regression analysis. The net effect is the amount of change in farm earnings which a unit change in that factor would cause if none of the other factors 1 More than half of all miscellaneous cost was for taxes for real estate and personal property. Since rate of taxation depends more on location than on organization and operation of farms, and since there appeared to be no signifi- cant difference in farm earnings due to miscellaneous cost, it is not discussed further. It was included in Tables 2 and 3 only so that all farm expenses might be considered in evaluating the relative effects of all efficiency factors on net farm earnings. 2 Many conditions which are more or less outside the control of the farm operator affect the efficiency with which the factors discussed in this publication are carried out. Among them are: (1) age of the operator; (2) education and training of the operator; (3) health of the operator and members of his family; (4) changes in the farm production plan; (5) unusual weather; and (6) unusual insect and disease attacks on both crops and livestock. These conditions, how- ever, affect farm earnings only as they affect the efficiency factors discussed in this study. 1952} WHY SOME FARMS EARN So MUCH MORE Table 2. — Net Effects of Each of Ten Efficiency Factors on Net Farm Earnings: 240 North-Central Illinois Farms Net effect of Net effect of TTnit r»f 1 unit of factor 1 unit of factor I- III t Ol on net earnings on net earnings Efficiency factors considered measure of factor used per $100 charged for per average farm having $5,525 land, labor, and capital charged for land, labor, and capital Factors that affect gross income : Crop-yield index 1 point $1.4123 $ 78 03 Crop-system rating 1 point 1.8471 102.05 Livestock-production index 1 point .8580 47.40 Percent of crop returns fed on farm 1 percent .0977 5.40 Price index 1 point 1.6891 93.32 Factors that affect farm expenses : Percent of normal labor cost 1 percent -.5673 -31.34 Percent of normal power and machinery cost 1 percent -.2898 -16.01 Percent of normal building and fence cost. . 1 percent -.1300 - 7.18 Limestone and fertilizer cost per tillable acre 1 cent -.0538 - 2.97 Percent of normal miscellaneous cost* 1 percent .0713 3.94 » Consisting of: taxes, 55.1 percent; miscellaneous crop expense, 22.7 percent; miscellaneous livestock expense, 13.2 percent; and general farm expense, 9.0 percent. changed (Table 2) . It is, of course, unusual and almost impossible for a given factor to change without producing changes in other factors. For this reason, the discussion on the following pages specifically points out associated relationships of each factor with the other factors. The estimates of the net effects are subject to error because of chance variations and the way the measures of each factor were com- puted. The adequacy of these factors as a group may be judged by the percent of the differences in earnings between high- and low-earning farms that is explained by them (Table 3). The amount of error due to chance variation was small. 2.000 ANNUAL NET EARNINGS PER FARM 4,000 6,000 7,000 8,000 9,000 10,000 11,000 ALL 240 FARMS — AVERAGE $8,73O 72 HIGHEST-EARNING FARMS — AVERAGE $10,670 H^HHHHfl 72 LOWEST-EARNING FARMS — AVERAGE $6,930 Net earnings of each of these groups were obtained by applying the aver- age net earnings per $100 charged for the use of land, labor, and capital to the average total charges per farm of all 240 farms. (Fig- 2) 10 BULLETIN No. 558 [August, Table 3. — Extent to Which Ten Efficiency Factors Were Responsible for Differences Between Average Net Earnings of 72 High- Earning Farms and 72 Low- Earning Farms Averages of measures of factors named Differences Percent of total differ- ences Factors that affect net farm earnings 72 farms with highest earnings 72 farms with lowest earnings In meas- ure of factor named In net earnings per farm Net earnings per $100 charged for land, labor, and capital $193.20 108.6 71.2 106.3 81.2 101.7 94.3 87.8 95.1 $ .56 101.3 $125.50 95.4 68.9 97.3 60.4 98.3 106.6 101.9 106.5 $ .41 99.7 $67.70 13.2 2.3 9.0 20.8 3.4 -12.3 -14.1 -11.4 $ .15 1.6 $3,740 $1 ,030 $235 $427 $112 $317 $385 $226 $82 -$45 $6 $2,775 $965 27.5 6.3 11.4 3.0 8.5 10.3 6.0 2.2 -1.2 .2 74.2 25.8 Factors that affect gross income : Crop-yield index Crop-system rating Livestock-production efficiency index Percent of crop returns fed on farm Price index Factors that affect farm expenses: Percent of normal labor cost Percent of normal power and machinery cost Percent of normal building and fencing cost . . Value of limestone and fertilizers used an- nually per tillable acre . . . ... Percent of normal miscellaneous cost* Total located differences in net farm earnings a Consisting of: taxes, 55.1 percent; miscellaneous crop expense, 22.7 percent; miscellaneous livestock expense, 13.2 percent; and general farm expense, 9.0 percent. Since the rate of taxation de- pends more on location than on the organization and operation of a farm and since this factor appeared not to be significant, it does not appear in the later tables. The relative importance of each of the ten efficiency factors is measured by the percent of the difference in earnings between high- and low-earning farms which is accounted for by the difference be- tween the two groups in the average measure of that factor1 (Tables 2 and 3 and Figs. 2 and 3) . Crop yields, accounting for 27.5 percent of the difference in earn- ings, were more than twice as important as any one of the other nine factors. Costs on farms with high yields did not average enough higher to offset the increase in yields (Fig. 3) . Efficiency in producing livestock accounted for 11.4 percent of the differences in earnings and was second only to crop yields in im- portance. Labor cost (10.3 percent), average prices received (8.5 per- cent), and the profitableness of the crop system (6.3 percent) were next in order. Together these five factors accounted for 64.0 percent of the difference in earnings between high- and low-earning farms. The other cost factors and the amount of livestock (measured by the value of feed fed as a percent of the total value of all crop returns) 1 This rather unusual measure of relative importance was chosen because it is easily explained. The measure is closely related to the coefficient of separate determination. For a discussion of the latter measure, see page 498 of Methods of Correlation Analysis by Mordecai Ezekiel (second edition) . 1952] WHY SOME FARMS EARN So MUCH MORE 11 Table 4. — Average Yields of Grain Crops on Farms Grouped According to the Crop- Yield Index* Crop 72 farms with highest yield indexes 96 farms with medium yield indexes 72 farms with lowest yield indexes Average of all 240 farms Crop-yield index. 113 9 100 0 89 6 101.4 Corn, bushels per acre 72.2 63.4 57.0 64.1 Oats, bushels per acre 56.5 49.0 43.7 49.7 Wheat, bushels per acre 26.0 23.6 23.8 24.3 Soybeans, bushels per acre 26 . 1 24.5 21.9 24.2 • Average yields were obtained by adding the ten-year average yields of farms in each group and dividing by the number of farms in each group, thus giving equal weight to each farm regardless of the acres of crops grown. Ten-year average yields for each farm were obtained by dividing total production for the ten years by total acres grown. accounted for 10.2 percent of the difference in earnings. The remain- ing 25.8 percent could not be accounted for by these factors. Yields of Grain Crops Of the total difference of $3,740 in average annual net earnings per farm between the 72 highest-earning farms and the 72 lowest- earning farms, $1,030 (27.5 percent) was accounted for by differences in the yields of grain crops. In addition, some of the $965 not accounted for was probably due to differences in yields of hay, pasture, and other crops. For average yields of corn, oats, wheat, and soybeans on these farms, see Table 4. The 72 farms having the highest yields of grain crops earned $1,860 more a year than the 72 having the lowest yields. This difference was greater than the difference between the 72 highest and 72 lowest farms for each of the other factors studied (Table 5, column 2). Of course not all the higher earnings on farms with high yields were due to higher yields (Fig. 3). Part of the difference was associated with (1) better livestock-production efficiency on farms with high yields; (2) higher prices received for products sold; and (3) more livestock. On the other hand, earnings on the farms with high yields tended to be pulled down by (1) high building and fencing costs; (2) high labor costs; (3) high power and machinery costs; (4) less profitable crop systems; and (5) high costs for limestone and fertilizers. Crop System Differences in the immediate profitableness of the crop system, as measured by the crop-system rating,1 accounted for 6.3 percent ($235) 1 The meaning of "crop-system rating" and the method of calculating it are given on page 36. •s 3 ±«-t C ^3 1111 ifli'Sl'1 :||Sl: |«ft g lls« ® Ej2 o £o^° 'C-C fij Illi Wt OS COO>-"O COO>-"O lOiC-^p- U500CO»H(N CSOSO— 100 •«J< OOOOOS.-I (% -HINOOIN CO OOCOCOIN'-i t-. 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S* ate I'e -„- «- |5 ^l^ias .2 » T3 3 1° o o o 2 -« jllltfl a**^**^*^QQ .^ W •••••••• 740 72 farms with highest CROP SYSTEM RATINGS minus 72 with lowest Livestock efficiency Amount of livestock Prices received Labor cost Power and machinery Building and fencing Lime and fertilizers -166 EH -80 E 375 23 147 114 124 0 TOTAL DIFFERENCE (Contributing factors) Crop yields Crop system -92 E ~ Amount of livestock Prices received Labor cost Power and machinery Building and fencing Lime and fertilizers -66 E -53 E 72 farms with highest LIVESTOCK PRODUCTION EFFICIENCY minus 72 with lowest 330 J22 6 TOTAL DIFFERENCE (Contributing factors) Crop yields Crop system Livestock efficiency ^HBBHBH 670 AMOUNT OF LIVESTOCK .•.;•,•,:•.•.•.•. •.•.::•. •.:::-.-l 788 -3"375(E= Prices received Labor cost Power and machinery Building and fencing Lime and fertilizers -30 [ -59C ryi |3j 72 farms feeding largest percentage of crop returns minus 72 feeding least II Net effects of several factors on farm earnings and their relationships to each other. (Not all differences in farm earnings are accounted for by these factors.) (Fig. 3) 1952} WHY SOME FARMS EARN So MUCH MORE 17 TOTAL DIFFERENCES IN NET FARM EARNINGS AND NET EFFECTS OF SEVERAL FACTORS CONTRIBUTING TO THE TOTAL DIFFERENCES -600 -300 0 $500 $1,000 $1,500 $2,000 TOTAL DIFFERENCE (Contributing factors) Crop yields Crop system Livestock efficiency Amount of livestock i 1 1 1 1 1 •!•!•!•!•!•'• } 273 S) 82 345 -4T9 EsiSiSSsSSS Labor cost Power and machinery Building and fencing Lime and fertilizers -41 E -36 E 378 0 72 farms with highest PRICES RECEIVED minus 72 with lowest TOTAL DIFFERENCE (Contributing factors) Crop yields Crop system Livestock efficiency Amount of livestock Prices received Labor cost Power and machinery Building and fencing Lime and fertilizers -I79l~~~ -109 EE -84 C 3SSU25 349 v:v.v.v.-.-.-.-.-. -.v.v.v.-.- -:«•;•;•:•:•:•:) I.IBS T?v!l 157 312 72 farms with lowest LABOR COSTS for amount of work done minus 72 with highest TOTAL DIFFERENCE (Contributing factors) Crop yields Crop system Livestock efficiency Amount of livestock Prices received Labor cost Power and machinery- Building and fencing Lime and fertilizers -164 r^T. -81 E 3 20 6 337 72 farms with lowest POWER AND MACHINERY COSTS for amount of work done minus 72 with highest •:-:•:•:•:•:•;-:•:•:•:•:::•:] 555 ??7^} 215 321 TOTAL DIFFERENCE (Contributing- factors) Crop yields Crop system Livestock efficiency Amount of livestock Prices received Labor cost Power and machinery Building and fencing Lime and fertilizers leo 381 •:-x-:-:-i 224 72 farms with lowest BUILDING AND FENCING COST for farm size and amount of livestock minus 72 with highest -6481:' ,'":,•••-. ';:-:.;.-:'::-i- '.'-,, -39 : -159 EZI x-:«\x*««•>* Sol Building and fencing costs on farms of — 100 to 179 acresb. . . $220 (11) 270 (11) 340 (5) 420 (5) 500 (0) .90 . (32) $275 (16) 325 (46) 400 (23) 500 (9) 600 (8) 1.01 (102) $345 (10) 390 (14) 475 (23) 585 (7) 700 (2) 1.11 (56) $410 $.63 (2) 460 .63 (9) 555 .72 (10) 675 .85 (3) 800 1.00 (7) 1.22 (31) (39) (80) (61) (24) (17) (221) 180 to 259 acres 260 to 339 acres 340 to 419 acres 420 to 499 acres Increase in building and fencing costs for one acre increase in size . . . Total number of farms in livestock-size groups. . m Based on ten-hour days of work. Figures in parentheses are numbers of farms. Only 8 farms were over 499 acres in size and only 12 had more than 449 days of work on livestock. b Including one farm of 84 acres. 1952} WHY SOME FARMS EARN So MUCH MORE 25 As an average of all the farms, increasing the amount of livestock without changing the size of farm resulted in an average increase in building and fencing cost of 70 cents for each additional day of labor required for livestock. Each additional acre of increase in size of farm with no change in the livestock enterprise meant an increase of $1.05 in building and fencing costs. The increase in building and fencing costs resulting from each ad- ditional day of work on livestock was greater for larger farms. In the same way, the increase resulting from increasing the size of farm was greater on farms with large amounts of livestock. Cost of Limestone and Fertilizer1 The 72 highest-earning farms used about 36 percent more lime- stone and phosphate and other purchased fertilizer per tillable acre than was used on the 72 lowest-earning farms (Table 3). In Table 5 therefore the highest-earning farms appear to show a loss for the use of limestone and fertilizer. Actually, however, as the cost was in- creased, crop yields and net farm earnings both went up (Fig. 3 and Table 5, row K). The 72 farms applying the most limestone and fertilizer used an average of 87 cents' worth per tillable acre annually during the ten years 1936 to 1945. Seventy-two other farms used only 18 cents' worth, about a fifth as much (Table 5-K11). Farms applying the most had 8.1 percent higher yields of grain crops and earned $520 a farm more. Helping to increase earnings on farms applying the most limestone and fertilizer were: (1) much higher crop yields; (2) higher prices for products sold; (3) more livestock; and (4) slightly higher livestock efficiency. Tending to decrease earnings on such farms were: (1) higher building and fencing costs; (2) higher labor costs; (3) higher power and machinery costs; and (4) less profitable crop systems. Well-Balanced Farm Programs Most Profitable Eight of the efficiency factors discussed in the preceding pages had significant effects on farm earnings. These were: crop yields, crop sys- tem, livestock-production efficiency, amount of livestock, prices of products sold, labor costs, power and machinery costs, and building and fencing costs. The records of the 240 farms were studied to learn the effect on farm earnings of being in the upper or lower half of the group in these factors. 1 As explained in the footnote on page 23, the limestone and fertilizer account was combined with the building and fencing account during the first four years. 26 BULLETIN No. 558 [August, RELATIOM TO NET FARM EARNINGS OF NUMBER OF EFFICIENCY FACTORS IN WHICH FARMS WERE ABOVE AVERAGE NET FARM EARNINGS PER $100 CHARGED FOR USE OF LAND, LABOR, AND CAPITAL ABOVE AVERAGE IN ALL 8 IMPORTANT FACTORS — 3 FARMS DIFFERENCE $1,655 ABOVE AVERAGE IN 7 FACTORS — 14 FARMS ABOVE AVERAGE IN 6 FACTORS — 27 FARMS ABOVE AVERAGE IN 5 FACTORS— 38 FARMS ABOVE AVERAGE IN 4 FACTORS— 62 FARMS H^HEC^^^^^^^^^^^HK ABOVE AVERAGE IN 3 FACTORS — 59 FARMS BOVE AVERAGE / See Table 2. 28 BULLETIN No. 558 [August, $5,449. The actual difference between the farms high in all eight factors and those low in all eight (theoretically, since none were actually low in all eight) was $5,525. Thus the actual difference checks closely with the calculated difference obtained by using the carefully calculated net effects of each factor on farm earnings. VOLUME OF BUSINESS AS RELATED TO NET FARM EARNINGS The preceding pages have discussed the relationships of several efficiency factors to the rate of earnings per $100 charged for the use of land, labor, and capital and to total net farm earnings. However, two things about the relation of volume of business to rate of earn- ings have been evident to the authors as the study progressed. First, the total volume of business as measured by the total charges for the use of land, labor, and capital had only little effect on the rate of net farm earnings, as indicated below. Second, the size of the hog enter- prise had a great influence on both the rate of farm earnings and the total net earnings per farm. Farms with medium -sized businesses had slightly higher rates of net farm earnings than farms with large or small businesses. Their advantage was not great. Ninety-six farms with medium-sized busi- nesses, as measured by the total charges for use of land, labor, and capital, had average net farm earnings of $6.70 more per $100 charged for the use of land, labor, and capital than the 72 farms with smallest businesses and $5.10 more than the 72 farms with largest businesses (Table 5, row L). The slight advantage in rate of earnings for medium-sized farms in north-central Illinois has been noted in farm- record analyses for many years. The greatest advantage of the medium-sized farm businesses over the small businesses evidently was in the 50-percent larger volume of hog production. Other small advantages were higher crop yields and a larger proportion of crops fed. Their advantage over the large busi- nesses was due to four factors: (1) greater livestock efficiency; (2) a larger percentage of crop returns fed on the farm; (3) lower labor costs for amount of work done; and (4) slightly lower power and machinery costs for amount of work done. Farms that became larger during the ten years had higher average annual rates of earnings than those that stayed the same size or became smaller. Earnings for 61 farms that increased in size were 1952] WHY SOME FABMS EARN So MUCH MORE 29 $163 per $100 charged for the use of land, labor, and capital and were only $156 for 122 that stayed the same size and 33 that became smaller. The advantage for the farms that increased in size was evi- dently due to their larger volume of business during the last five years of the period, when the rate of earnings was highest. Part of the $965 difference between the high- and low-earning groups of farms which was not accounted for when the net effects of ten efficiency factors were calculated (Table 3) was probably due to the fact that more of the high-earning farms than the low-earning farms increased in size during the period. Twenty-five of the 72 high- earning farms and only 15 of the 72 low-earning farms became larger during the ten years. Size of hog business. The 72 farms that had the highest rate of net farm earnings produced an average of 52,800 pounds of hogs annually, while the 72 farms with the lowest rate produced only 22,900 pounds. Profits from hogs averaged $1.43 per 100 pounds produced for the ten years.1 If hogs were produced with equal efficiency on the two groups of farms, this profit would give an advantage due to profits from hogs of $428 in favor of the high-earning farms. Livestock-production efficiency, however, was greater on the more profitable farms (Fig. 3 and Table 5, row A), so the real difference in earnings due to the greater hog production was probably more than $428. This accounts for much of the difference in earnings that was not accounted for by the effects of the ten efficiency factors. The difference in earnings due to large volume of hog production, however, was greater than can be expected during more normal times, for during the ten years hog production showed greater-than-average profit. Farms producing large numbers of hogs had much higher rates of net earnings than those producing small numbers of hogs. Seventy- two farms produced an average of 70,400 pounds of hogs annually and had net earnings of $9,550 a farm; 72 others produced only 10,100 pounds and had net earnings of only $8,000 a farm (both groups based on average size of farm business). The difference in earnings between these two groups was thus $1,550 a farm annually. Differences in profits from the hog enterprise accounted for $860 of this difference. About $700 of the difference was due to the 8.8 percent higher yields of grain crops on those farms producing the most hogs (see Table 2 for 1The cost of producing hogs used in this study was the average cost on farms in Champaign and Piatt counties during the ten years 1936 to 1945, as determined by the Department of Agricultural Economics. 30 BULLETIN No. 558 [August, ANNUAL NET EARNINGS PER FARM 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 1936-1940 AVERAGE— $4,7OO 1941-1945 AVERAGE— $8,800i 1936-1940 AVERAGE OF ALL 48 FARMS— $5,750 48 FARMS WITH ABOVE-AVERAGE EARNINGS. 1936-1940 1941-1945 AVERAGE OF 24 FARMS THAT INCREASED LEAST— $7,9IO BBBIii^BaBBQnHS 1941-1945 AVERAGE OF 24 FARMS THAT INCREASED MOST—$I2.55O 1936-1940 AVERAGE OF ALL 48 FARMS— $3,800 48 FARMS WITH BE LOW- AVER AGE EARNINGS, 1936-1940 1941-1945 AVERAGE OF 24 FARMS THAT INCREASED LEAST— $5,430 ••^••^••J 1941-1945 AVERAGE OF 24 FARMS THAT INCREASED MOST— $9.580 Farmers whose earnings were already above average increased their earn- ings more during the period than did farmers whose 1936-1940 earnings were below average. Average annual net farm earnings were calculated by apply- ing the average rate of the group to the average capital investment of all 240 farms. (Fig. 5) net effect of crop yields on net farm earnings). Other efficiency fac- tors had only minor influences up or down on the net farm earnings of the two groups of farms.1 HOW SOME FARMS INCREASED THEIR EARNINGS MORE THAN OTHERS Net farm earnings on the 240 farms averaged $4,700 per farm annually during 1936 to 1940, and $8,800 annually during 1941 to 1945. While most of this increase was due to wartime conditions during the last five years, some of it was undoubtedly due to increased effi- ciency. A fifth of the 240 farms increased their earnings during the period by $4,400 more than another fifth increased theirs (Fig. 5) . Earnings advanced more on high-earning farms than on low- earning farms. For the 240 farms the median rate earned on the in- 1 For a fuller discussion of the effect of volume of hog production on net farm earnings, see Illinois Bulletin 548, "Livestock Earnings on North-Central Illinois Farms." 1952} WHY SOME FARMS EARN So MUCH MORE 31 vestment1 increased from 8.1 percent during 1936 to 1940 to 15.0 per- cent during 1941 to 1945, an increase of 6.9 in the rate. The farms were divided for further study into two groups of 120 farms each: those that earned more than 8.1 percent during the first five years, and those that earned less than 8.1 percent. This was done in order to learn if there was any difference between low-earning and high- earning farms in their ability to increase their earning power. From each group of 120 farms, 48 farms were selected; 24 were from those in the group that showed the largest percentage increase in rate earned, and 24 from those that showed the smallest percentage increase in the rate earned. Within each group of 120, the 24 farms that had a large percentage increase and the 24 with a low increase were selected in such a way that for each farm that increased most there was one that increased least that earned approximately the same during the first five years. The rate for the 24 high-earning farms selected from those that increased most rose from 9.8 percent for 1936-1940 to 21.5 percent for 1941-1945. This was an increase of 11.7 in the average rate earned on investment (Table 13). The rate for the 24 high-earning farms selected from those that increased least went from 9.9 percent for 1936-1940 to 13.6 percent for 1941-1945, an increase of 3.7 and much less than the increase for the 24 high-increase farms. The 48 high-earning farms earned an annual average of about $5,750 each during the prewar period (Fig. 5). The 24 from the group that increased the most earned average incomes of $12,550 during the years 1941 to 1945, which was $4,640 more a year than the 24 farms from the group that increased the least. The 24 low-earning farms selected from those that increased most increased 7.1 points more than the 24 low-earning farms selected from the group that increased least (Table 13). This difference was less than the 8.0 difference for similar groups of high-earning farms. The 48 low-earning farms (24 from each group) averaged $3,800 a farm a year during the prewar period of 1936 to 1940. The 24 from the group that increased least averaged $5,430 during the war years of 1941 to 1945. At the same time, the 24 selected from those that in- creased most earned $9,580 a farm, which was $4,150 more than the 24 low-increase farms earned. 'The rate earned on the investment in land and buildings and operating capital was used in this study because it had already been calculated annually for each farm and the annual net earnings per $100 charged for the use of land, labor, and capital based on adjusted land values had not been calculated. The prewar value of land was used in this particular study. 32 BULLETIN No. 558 [August, Table 13. — How Several Efficiency Factors Changed From 1936-1940 to 1941-1945 on 48 Farms With High Earnings in 1936-1940 and 48 With Low Earnings in Same Period Item Average of farms selected from 120 that increased most in rate of earnings Average of farms selected from 120 that increased least in rate of earnings First Second five five years years Net change First five years Second Net change 13.6 9.3 Average of two groups 60.9 70.0 +9.1 Yield of oats, bushels per acre 24 high-earning farms 54.3 51.9 —2.4 24 low-earning farms 49.8 47.8 —2.0 Average of two groups 52 . 0 49 . 8 —2.2 8.2 64.6 58.4 61.5 53.0 49.0 51.0 69.8 63.9 48.9 43.7 46.3 +3.7 +2.8 Percent earned on investment 24 high-earning farms 9.8 21.5 +11.7 24 low-earning farms 6.5 16.4 + 9.9 Average of two groups STT 18.9 +10.8 Yield of corn, bushels per acre 24 high-earning farms 63.5 71.8 +8.3 24 low-earning farms 58.3 68.2 +9.9 11.4 +3.2 +5.2 +5.5 +5.4 -4.1 -5.3 -4.7 Percent of tillable land in corn 24 high-earning farms . 41. 9 6 2 3 3 43.4 41.4 +1. + . 6 8 40. 40. 1 7 40. 41. 7 7 +ll 6 0 24 low-earning farms . . 40. Average of two groups . . 41. 42.4 23.2 23.8 +1. +l'. 2 1 5 40. 24. 25. 4 2 7 41. 24. 25. 2 3 6 + . + . 8 1 1 Percent of tillable land in hay and pasture 24 high-earning farms . 23. 24 low-earning farms . . 22. 22. 8 3 5 23.5 20.2 28.0 + . -2. -5. 7 1 6 24. 33 36. 9 3 8 24. 30. 32. 9 0 4 -3. -4. 0 3 4 Percent of gross farm earnings from grain 22 24 low-earning farms .. 33. . . 27. 9 3 ,9 24.1 111.2 100.8 -3. +5. +7. 8 9 9 35. 102 97 0 1 2 31. 103. 94. 2 4 0 -3. +1- -3. 8 3 2 Livestock-efficiency index 105, 24 low-earning farms . . 92, . . 99. 1 .6 .1 106.0 29.4 29.7 +6. -2. + . 9 2 6 99. 48 41 6 .1 .3 98. 52. 40. 7 5 0 +4. 9 4 3 Number of forage-consuming animal units 24 high-earning farms . 31 24 low-earning farms .. 29 Average of two groups . . 30 3 .7 ,0 29.5 91.2 94.0 -12, -12. 8 5 0 44 102 112 ,7 .8 .0 46. 103. 115. 2 7 0 +1. +3. 5 9 0 Percent of normal labor cost 24 high-earning farms . 103 24 low-earning farms . . 106 Average of two groups . . 104 ,8 .6 .0 92.6 89.4 90.0 -12. - 9. -14. 2 2 0 107 92 102 .4 .7 .0 109.3 101.7 111.0 +1.9 +9.0 +9.0 Percent of normal power and machinery cost 24 high-earning farms . 98 24 low-earning farms . . 104 . . 101 3 88 54 89.7 -11. 275 +29 265 - 8 270' +11 700 +35 200 600 +25 300 6 97 289 268 278 28300 17600 3 40 22 106.3 +9. 307 +18 268 0 287 + 9 200+11 900 100 +4 500 0 Size of farm, total acres . . 246 24 low-earning farms . . 273 Average of two groups . . 259 Pounds of hogs produced 24 high-earning farms 53500 29300 24 low-earning farms Average of two groups 41 400 71 650 +30 250 22950 31 150 +8200 1952] WHY SOME FARMS EARN So MUCH MORE 33 Thus fanners who were already making their farms earn most, in- creased their earning power during the war years a little more than those who had earned least during the prewar years. The percentage increase, however, was greater on the low-earning farms. In the two groups the 48 farms that increased their earnings the most (1 in 5 of all farms) realized more than $20,000 a farm greater increases in earnings during the five years 1941 to 1945 than the 48 that increased earnings least. Both groups had earned the same during 1936-1940. How did some farmers increase their earning power so much more than others? Aside from causes outside the operator's control, there can be no such increase in farm earning power without changes in the ways in which the farms are organized and operated. The follow- ing changes in efficiency factors among the 48 farms that increased most (10.8 points in rate earned) as compared with the 48 farms that increased least (3.2 points in rate earned) account for most of the differences in net earnings. Livestock efficiency was increased more. More of the farms that increased their earnings the most increased livestock efficiency than in- creased the efficiency of any other factor. The index of livestock effi- ciency rose 6.9 points on the farms with a high increase in earnings and dropped 0.9 point on the low-increase farms. Crop yields went up more. Average corn yields were 9.1 bushels higher during 1941-1945 than during 1936-1940 on the 48 farms that increased most and only 5.4 bushels higher on the 48 farms that in- creased least. Oat yields declined less on the farms that increased most in earnings. Labor costs were reduced. Labor costs were cut 12.2 percentage points on the 48 farms that increased most in earnings and went up 1.9 points on the 48 that increased least. Power and machinery costs differed widely. Power and machinery costs were reduced 11.6 percentage points on the 48 farms that in- creased their earnings the most and went up 9.0 points on the 48 farms that increased their earnings the least. The reduction in cost of both labor and power and machinery on several of the farms that had the greatest increase in earnings was not due to an actual reduction in those costs but was due to the greater acreages of crops and amounts of livestock produced with the same amounts of labor and power and machinery. During the war some farmers were forced to work with less labor and machinery. It is to 34 BULLETIN No. 558 [August, their credit that they did this with increases in efficiency of crop and livestock production. Hog production was increased more. The 48 farms that increased most in earnings produced 30,250 more pounds of hogs annually during the war years than during the prewar years. The 48 that increased least raised only 8,200 pounds a year more during the same time. This greater increase of 22,050 pounds of hogs a year was enough to cause a greater increase of about $300 a year in net farm earnings. EXPLANATION OF TERMS USED IN THIS STUDY Net earnings per $100 charged for the use of land, labor, and capital. See Table 14 for method of calculating this measure. It differs from "rate earned on investment" in that it credits profits and management returns to land, labor, and capital rather than to land and capital alone. Table 14. — Method of Calculating for a Typical Farm Each Measure of Farm Earnings Referred To in This Study Basic data Farm investment Bare land $71 342 Buildings, fences, and land improvements 10 293 Machinery, livestock, and feed and grain 16 001 Total farm investment $97 636 Farm and family earnings Total cash income $14 162 Total cash expense 6 671 Cash balance $ 7 491 Inventory change +1 016 Home-used farm produce 303 Total farm and family earnings $ 8 810 Net earnings per $100 charged for use of land, labor, and capital Total farm and family earnings $ 8 810 Total paid for hired labor 1 135 Net earnings for use of land, labor, and capital $ 9 945 Charges for use of land, labor, and capital Land (4 percent of value of bare land) 2 854 Labor (all hired, family, and operator's labor) 2 139 Capital (5 percent of farm investments other than land) 1 315 Total charges $ 6 308 Net earnings per $100 charged for use of land, labor, and capital ($9,945 H- $6,308X100) . . $ 158 Rate earned on investment Total farm and family earnings $ 8 810 Unpaid family and operator's labor 1 004 Returns for investments and management $ 7 806 Rate earned on investment ($7,806 -f- $97,636X100), percent 8.0 Operator's labor and management earnings Total farm and family earnings $ 8 810 Unpaid family labor (other than operator's) 265 Returns for operator's labor, management, and capital $ 8 545 Interest on farm investments (4 percent of value of bare land plus 5 percent of value of buildings, fences, land improvements, and operating capital) 4 169 Operator's labor and management earnings $ 4 376 Management earnings Operator's labor and management earnings $ 4 376 Operator's labor _ 739 Management earnings $ 3 637 1952] WHY SOME FARMS EARN So MUCH MORE 35 The average charges for all 240 farms for the use of land, labor, and capital were: Land (4 percent of the average land value of $65,592) $2,624 Labor (hired, family, and operator's labor) 1,834 Capital (5 percent of the average value of buildings, fences, ma- chinery, livestock, and feed and grain of $21,332) 1,067 Total $5,525 Rate earned on investment. See Table 14 for method of calculating. Operator's labor and management earnings. See Table 14. Management earnings. See Table 14. Farm and family earnings. These consist of the total cash income less the total cash expense, plus increases in inventories, less decreases in inven- tories, and plus the value of farm products used in the farm home. On rented farms the earnings of both the tenant and the landlord are included in the farm and family earnings. Method of evaluating the land. The value placed on the land on each farm was adjusted to the productive value of rented farms in Woodford county during the ten years 1936 to 1945 that had the same productivity rating of the tillable land. Woodford county is about in the center of the area in which the farms are located. The productive value of the rented farms was calculated by capitalizing the landlord's net rent from the bare land at 4 percent. Net rent consists of gross income less taxes, insurance, and other operating costs. The average values for given soil-productivity ratings are: Soil-productivity rating Value per acre of tillable land of bare land 1.0 $270 1.5 280 2.0 265 2.5 239 3.0 209 3.5 188 4.0 172 4.5 157 5.0 144 The value of nontillable land was adjusted from the book value that had been placed on it by the percentage adjustment made to the value of the till- able land. The tillable land on each farm was rated from 1 to 10 according to the rating used by the Soil Survey division of the Illinois Experiment Station at the tune of this study. The soils that were naturally most productive rated as 1 and the least productive soils as 10. The No. 1 soils, which are mostly level, have been cropped so heavily during the past century that they are now less productive than the good, slightly rolling soils that have not been cropped so heavily. Since this study was made, the 1 to 10 rating system was revised. The new system rates soils on the basis of 1 to 100, with 100 corresponding to the previous rating of 1. 36 BULLETIN No. 558 [August, Crop returns. This is a measure of the value of all crops produced. It is calculated by subtracting the value of crops on hand January 1 and the value of feed, seed, and grain that was bought from the sum of the values of feed and grain on hand December 31, the value of crops sold, the crops (including pasture) fed on the farm, and the crops used by the farm family. The actual value of the crops produced each year could not be calculated because the amounts and values of many miscellaneous crops were not available. "Crop returns" is about the same as "value of crops produced" when the average record of several years is obtained. It is affected each year by changing inventory values. Crop-system rating. This rating is a measure of the immediate profit- ableness of the crop system, or as some say, the profitableness of the rotation. It does not place any value on fertility added or removed. All crops were rated according to the net returns per acre obtained on cost-accounting farms in Champaign and Piatt counties during the ten years 1936 to 1945. "Net returns per acre," as used here, is the difference between the total income realized from the crop, considering both grain and roughage, and the total expense of growing the crop, including taxes on the land but not including interest on the land investment or any charge for management. Ratings for different crops were: Corn, including silage corn 100 Soybeans for grain 75 Wheat 50 Barley 40 Oats 35 Alfalfa for hay or pasture 60 Sweet clover for pasture 50 Clover and mixed clover and timothy for hay or pasture 30 All other pasture on tillable land 30 Timothy and other nonlegume hay 25 Soybean hay 0 All other crops (for the most part, canning crops such as sweet corn and peas, hemp on some farms, and grass and clover seeds) 100 No rating was given to soybean hay because the value of the crop was about equal to the cost of growing it. The acreages of the different crops were multiplied by the above ratings and totalled and the total then divided by the total acres of tillable land to obtain the crop-system rating. The farms with the highest ratings were there- fore the farms that had large acreages of corn, soybeans, wheat, and alfalfa; and the low-rating farms had large acreages of oats, timothy and clover, and bluegrass on tillable land. Crop-yield index. The index is a measure of the yield of all grain crops on a farm, weighted according to the acreages of the different crops on that farm. In this study the index was adjusted to the productivity rating of the soil. Average yields for the ten years were: 1962} WHY SOME FABMS EARN So MUCH MORE 37 Soil-productivity Corn Oats Wheat Barley Soybeans rating (bushels per acre) 1.5" 66.8 51.0 27.5 39.2 26.0 2.0 65.5 51.4 24.7 32.8 24.9 2.5 62.5 48.6 22.8 28.5 23.8 3.0 60.7 46.5 22.0 26.8 22.7 3.5 56.5 44.2 22.0 26.5 21.6 4.0 55.0 43.2 22.0 (b) 21.5 4.5 53.7 42.4 22.0 (b) 21.5 5.0 52.6 41.8 22.0 (b) 21.5 a No farm had all No. 1 soils. b No barley on these soils. How the crop-yield index was calculated for a farm with a 2.0 soil rating is shown below. Average Acregre. Total Yield acre-yields quired at Acres produc- per for 2.0 average Crop grown tion acre soil rating yield bu. bu. bu. Corn 100 8,500 85.0 65.5 129.8 Oats 25 1,250 50.0 51.4 24.3 Wheat 25 750 30.0 24.7 30.3 Barley 25 1,000 40.0 32.8 30.5 Soybeans 50 1,750 35.0 24.9 70.3 Totals 225 .... .... 285.2 285.2 (acres at average yield) + 225 (acres grown) = 1.268 1.268 X 100 = 126.8, the crop-yield index Index of livestock-production efficiency. The livestock-production in- dex is the percentage that the total returns from all productive livestock (with returns adjusted to average prices received on all farms for livestock and livestock products) is of the total returns, calculated at the average rate of returns for each class of livestock. As an illustration, the actual total returns from productive livestock on the sample farm in Table 14 amounted to $12,531. These returns were $728 lower than average because of lower-than- average prices received for cattle, hogs, milk, and eggs. The returns were therefore adjusted by adding $728 to the actual returns, making the adjusted production returns $13,259. The total returns when figured at the average rate of returns amounted to $11,490. Since $13,259 is 115 percent of $11,490, the livestock-production index of the farm in Table 14 is 115. Price index. The price index of a farm is the percentage that the total value of the sales of all grain, livestock, and livestock products on that farm is of what the total value would have been if all products had been sold at the average prices received by all farms. (See Table 6 for average prices received during the ten years.) The price of cattle varies greatly with the class of cattle. When calcu- lating the price index, the average price with which each farm's cattle price was compared was the ten-year average price of cattle from enterprises having the same percentage of cattle units represented by cows milked. These prices 38 BULLETIN No. 558 [August, were lower for herds where more milking was done. Thus where 5 percent of the cattle units were cows milked, the ten-year average price per 100 pounds was $12.20; for 10 percent, $11.65; 15 percent, $11.20; 20 percent, $10.85; 25 percent, $10.60; 30 percent, $10.40; 35 percent, $10.25; 40 percent, $10.15; 45 precent, $10.05; 50 percent, $9.45; 55 percent, $9.00; 60 percent, $8.70; and 65 percent or more, $8.50. Percent of normal labor cost. Labor costs include hired labor, unpaid family labor, and the operator's labor used in operating the farm business. The percent of normal labor cost for a farm is the percent the labor cost of that farm is of the average labor cost on farms having the same labor requirements. Labor requirements were measured by the man-work units of work required for the crops and livestock produced. See Table 15 for illustration. Man-work unit. This measures the amount of work the average man does in ten hours. Total man-work units on crops for a farm are calculated by multiplying the number of acres of each crop by the average hours of labor required to produce an acre of the crop and dividing the total number of hours by ten. A similar calculation is made for livestock, based on the number of units of each kind of livestock. The time required to produce different kinds of crops and livestock in Champaign and Piatt counties where cost-of-production studies were conducted during 1936 to 1945 was the basis for calculating man-work units required for the crops and livestock in the area where the farms used in this study are located. Table 15. — Method of Calculating Percent of Normal Labor Cost, Machinery Cost, Building and Fencing Cost, and Miscellaneous Cost on a Sample Farm Percent of normal labor cost Man-work units on crops .......................... '. ............................... 179 Man-work units on livestock ....................................................... 357 Labor cost on similar farms ........................................................ $2 054 Labor cost on sample farm ......................................................... 2 596 Percent of normal labor cost ........................................................ 126 Percent of normal machinery cost Man-work unjts on crops .......................................................... 179 Man-work units on livestock ....................................................... 357 Machinery cost on similar farms .................................................... $1 666 Machinery cost on sample farm ..................................................... 1 664 Percent of normal machinery cost ................................................... 100 Percent of normal buildings and fencing cost Total acres in farm ................................................................ 480 Man-work units on livestock ....................................................... 357 Buildings and fencing cost on similar farms ........................................... $ 787 Buildings and fencing cost on sample farm ........................................... 665 Percent of normal buildings and fencing cost ........ ................................. 85 Percent of normal miscellaneous cost Total acres in farm ................................................................ 480 Man-work units on livestock ....................................................... 357 Miscellaneous costs on similar farms ................................................. $1 170 Miscellaneous costs on sample farm ................................................. 880 Percent of normal miscellaneous cost ................. ............................... 75 1952\ WHY SOME FARMS EARN So MUCH MORE 39 Percent of normal machinery cost. Machinery costs include fuel, oil, and grease, and repairs and depreciation on all machinery and equipment. The farm's share of depreciation and cost of operating the family automobile is included. The percent of normal machinery cost for a farm is the percent the machinery cost of that farm is of the average machinery cost of similar farms, that is, of farms requiring the same number of man-work units on crops and livestock (Table 15). Percent of normal building and fencing cost. This includes repairs and depreciation on all buildings, fixed equipment, and fences. The percent for a farm is the percent the building and fencing cost on that farm is of the average cost on farms of the same size and having the same amount of livestock (Table 15). Percent of normal miscellaneous cost. These costs consist of all oper- ating costs not included as labor, machinery, or building and fencing costs. They include taxes, miscellaneous crop and livestock costs, and other minor miscellaneous costs. The percent for a farm is the percent that the miscel- laneous costs of that farm is of the average costs on farms of the same size and having the same amount of work on productive livestock (Table 15). NOTE ON THE STATISTICAL RESULTS The regression of net earnings on the ten efficiency factors was calculated from the data for each of the 240 farms. The net regression coefficients are given in the text in Table 2. The standardized net regression coefficients together with their standard errors and the ratio of each regression coefficient to its standard error are shown below. "Percent of total difference in net earnings," which is the criterion of relative importance used in this report, is shown for each factor so that it may be compared with the standardized regression coefficients and the coefficients of separate determination. Percent of total differ- ence in net earnings (see Table 3) Crop-yield index 27 . 5 Livestock-production index 11.4 Percent of normal labor cost 10.3 Price index 8.5 Crop-system rating 6.3 Percent of normal power and machinery cost 6.0 Percent of crops fed 3.0 Percent of normal building and fencing cost 2.2 Limestone and fertilizer costs per tillable acre 1.2 Percent of normal miscellaneous costs .2 The probability of getting regression coefficients as large as these if the true values were zero would be less than 1 percent for all coefficients except the last two. For these the probabilities are 7 percent and 14 percent respec- tively. Thus the possibility is remote that any of these factors, except perhaps the measures of miscellaneous costs and limestone and fertilizer costs, are not related to earnings. Standardized regression coefficients Standard error of standardized regression coefficients Ratio of regression coefficients to their standard errors Coefficient* of separate determina- tion .4976 .3719 -.3137 .3062 .2415 .0425 .0401 .0441 .0404 .0375 11.76 9.28 -7.11 7.58 6.44 .2399 .1019 .1215 .0723 .0563 -.1873 .1349 .0437 .0401 -3.74 3.36 .0696 .0349 - . 1632 .0429 -3.80 .0314 - .0567 .0381 -1.49 -.0067 .0446 .0412 1.08 -.0022 40 BULLETIN No. 558 SUMMARY A study of farm-account records of 240 similar north-central Illi- nois farms showed that the 72 highest-earning farms earned an aver- age of $3,740 a farm annually more than the 72 lowest-earning farms during the ten years 1936-1945. Eight efficiency factors accounted for about three-fourths of this difference. These factors and their net effects on net farm earnings were: crop yields, accounting for 27.5 percent of the difference; livestock production efficiency, 11.4 percent; labor cost, 10.3 percent; prices received for products sold, 8.5 percent; the immediate profitableness of the crop system, 6.3 percent; power and machinery cost, 6.0 percent; percent of the value of all crops produced that was fed on the farm. 3.0 percent; and building and fencing cost, 2.2 percent. Important relationships were found among the eight efficiency factors having appreciable effects on net farm earnings. Thus farms with high crop yields usually had large amounts of livestock and more efficient livestock production, but also had higher than average labor costs and power and machinery costs. Low labor costs were closely associated with low power and machinery costs and high labor costs with high power and machinery costs. The rate of earnings was slightly larger on farms having a medium- sized business requiring about 24 months of man labor than on farms with smaller or larger businesses. Farms on which many hogs were produced had higher rates of earnings than farms with few hogs. This was due largely to the fact that corn-hog ratios were favorable to hog production during the ten years of the study. Well-balanced farming, where each of the factors that have an appreciable effect on earnings was above average, led to the highest net farm earnings; three farms that were above average in all eight factors earned $3,760 a farm annually more than the average of all 240 farms included in the study. Twelve other farms below average in seven of the eight factors (none was below in all eight) earned $1,485 a farm less than the average of all farms. A farmer may do excellent work along one or two lines and still have low net farm earnings be- cause he neglects other factors. The lowest-earning farm among all 240 farms was near the top in crop yields. Alert farmers who study their business and apply the recommenda- tions of the agricultural experiment stations and the practices of successful neighbors do increase their earnings. 12M— 8-52— 49545 UNIVERSITY OF ILLINOIS-UHBANA